Tuesday’s Tip: When To Go With A Two-Tier ERP Strategy

Published on March 2, 2010 by R "Ray" Wang

Single Instance ERP Harder And Harder To Justify

The holy grail of an ERP implementation used to be the single instance deployment. However, market forces, a move to adopt new disruptive technologies, slow pace of innovation from incumbent vendors, and high maintenance fees have changed many organization’s perspectives. Add a slew of rapidly changing business requirements battling rigid legacy infrastructures and next gen CIO’s have been forced to depart from the standard apps strategies. In fact, improved integration, web services, and SaaS deployments have now improved the success rates and ROI for Two-Tier ERP apps strategies.

Purpose built or industry requirements (89.61%). Next gen IT leaders remain frustrated by the lack of innovation and progress in completing out promised functional footprints. As market competition intensifies, industry specific, purpose built solutions provide the competitive advantage needed for survival and success.

Upgrade too expensive (45.45%). Many customers face upgrade costs equivalent to reimplementation. Cost factors could equal up to 85% of the original implementation cost.

Need to innovate (35.06%). Some organizations find that their vendors have not innovated fast enough. Social channels have not been accounted for. User experiences seem dated. Reporting and analytics require experts to deliver. Paucity in mobile solutions hinder productivity.

Regulatory compliance (24.68%). The need to meet industry specific regulatory compliance drive organizations to choose purpose built solutions. Many choose SaaS to mitigate the costs of legislative and regulatory updates.

Geographic requirements (19.48%). Country or region specific requirements may require two-tier strategies based on geography. Some ERP systems lack the language or tax requirements and a separate instance will prove cheaper to run than customizing a monolithic large ERP solution.

Existing systems too rigid (15.58%). Rigidity may lead to the inability to integrate and work with other systems, new channels, and emerging stakeholders. Integration solutions can assist, but long term, next gen IT leaders will begin to surround legacy solutions with newer technologies.

The Bottom Line – Users Should Consider Scenarios Based On Business Models And Geographic Needs

Detailed apps strategy conversations highlight 3 scenarios where Two-Tier ERP strategies make sense. A number of vendors have proven to be strong partners in enabling Two-Tier ERP (see Figure 3).

Different business models. Organizations with very different lines of businesses often consider hub and spoke implementations. The drive to standardize on a single ERP system makes little sense when one subsidiary delivers services and the other manufactures goods. Several large multi-national conglomerates leverage more than two-tiers of ERP to handle a warranty business, financial services, and power generation manufacturing.

Country specific deployments. Deploying a full scale ERP solution makes little sense for new subsidiaries when options exist at lower operating costs and higher ROI. One large Japanese manufacturer found cost savings with local based systems in North America and EMEA.

Phased modernization efforts. Organizations looking to upgrade and modernize their systems may keep some legacy systems in place as they upgrade to more modern systems. One large entertainment concern has kept their financials systems and updated their retail systems with a more modern, web services based, SOA architected product.

Figure 3. Vendors To Watch In Two-Tier ERP Apps Strategies

Your POV.

Have you deployed a Two-Tier ERP strategy? How has it gone? What’s worked? What’s not? You can post or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.

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Great article. This is clearly what we see happening at Exact too. More and more organizations use this second tier approach because of a much lower TCO. As a matter of fact, we see the trend that organizations, who plot themselves into the ‘enterprise’ group, for similar reasons turn to second tier solutions, too.

Exact has offices in 40 countries and customers in 125 countries. We have gone to market with this second tier strategy for a number of years now, and this continues to prove very successful. Unfortunately you did not mention Exact in your list of providers. I would like to give you an update on our current strategy and discuss some of our references.

There’s an old adage about newspapers. Newspaper information is 95% right. The only information that is wrong is the 5% you know something about. There is a similar formula in ERP when it comes to vertical requirements. Industry vertical market providers tend to find that ERP vendors, whether Tier 1 to Tier 3, are unable to match their offering. ERP often lacks feature sets, effective industry processes, speed to implementation, optimal technical footprint etc. I think that many vertical vendors think that ERP systems have trouble only in 1 vertical. Your data seems to show the opposite where the majority of responses aren’t looking for single source with industry requirements at the number 1 reason.

When is ERP really ERP?

The market consolidation has created some vendors who have multiple horizontal (CRM, SCM etc.) and/or vertical (manufacturing, government, retail etc.) products. These companies tend to be positioned in the ERP category because it’s become a meme. But really, is Accpak ERP? We need more effective categorization to reflect the complexity of the market.

The end of ERP as we know it?
We may be in the final stage of ERP dominance. The signs are:

(1) Client/server behind the curtain The use of client/server legacy technology as a base for ERP – such as ABAP or PL/SQL means that “applistructures” are unable to adapt to achieve end-to-end process requirements. (Despite all the BPM thrown at it.) It is becoming more and more difficult to adapt and maintain generic ERP software to satisfy what industry packages have out of the box. The ERP category took off in the days when traditional vertical software did not provide complete industry solutions. Today, customers wonder whether to adapt to meet the needs of the software or adapt the software to support their unique business advantage.

(3) Generic business models. Staff in enterprise software companies know how software companies are meant to behave and operate. The business model has been set, albeit disrupted by Cloud Computing. It is operationally inefficient to treat different classes of customers in a different way. For example, in my market, one of the main predictors of success is the contractual involvement (prime, sub or JV) of the software vendor with the customer. Tier 1 and some Tier 2 companies cannot afford to adjust business models across a number of vertical and geographic markets making their offering less than optimal.

(4) Standards. We will tell our children about the day when vendors owned customers. We’ll talk about the portfolio management argument when it was better for large organizations to buy single source ERP to reduce TCO. And, this was before standards were fully adopted and middleware became a commodity. In fact, in the old days, the ERP companies owned middleware and charged for it! It is becoming easier to integrate modern component-based SOA designed software from multiple vendors than to integrate within a single source ERP. And, the atomic integration needed is not there in ERP, yet. Technical standards are eliminating the key IT value point for ERP.

(5) Crossed Chasm and the Tornado has spun out. Yes, ERP has entered the laggard market. Success in this level of maturity involves providing complete solutions and being customer intimate. Many enterprise software companies have focused on shipping during the tornado period. Innovation, per se, is not attractive. Technical features and terminology does not sell to the decision-makers – because IT is becoming less involved in the decision.

Complexity costs
The next 2 reasons why customers do not consider single source ERP is initial price and upgrade price. That’s despite the portfolio management argument. Customers understand the long term cost and remain wary of vendor TCO talk.

Reality? There is a high cost per customer to the ERP vendor compared to the vertical vendor. There is more technology and more Quality Assurance for multiple market vendors. There doesn’t seem to be an economy of scale where the costs begin to drop on a per customer or per package basis after achieving 100 or so customers. That’s how vertical vendors with $10M to $20M in annual revenue can achieve profitability and compete effectively with the $1B+ vendors.

Customers of vendors with single market solutions find upgrades far less onerous than with ERP. Single market solutions tend to primarily configured rather than customized. Change management and QA costs are far less.

Single Source Vertical?

We’ve found that the use of modern software architecture enables extensibility. There are so many proven open source tools and middleware platforms available. Real object-oriented development techniques have been able to accelerate product releases. We have been able to tune the application platform to address our target vertical. Software architecture used for multiple customer types is a compromise. There is no such thing as an optimal architecture for all possible ERP customers. One often has to build in functionality that is not needed for many vertical or horizontal markets. (Of course increasing the footprint, power consumption, chances of failure and costs.)

There may come a day when customers consider a single source vertical application rather than a multi-industry ERP.

Nice post Ray.
I have some thoughts around the reasons not mentioned explicitly here but are important.
1. Is the organization ready to merge differently ‘cultures’ and ‘ideologies’ into one monolith?
2. Do we want to make the local entities force fit into a global solution. Is this ‘big brother’ approach good for organization?
3. Why not leverage what is best for business with underlying tenet of ‘simplicity’
4. Are users ready for a radical change?
5. With maturing integration scenarios, mechanisms and reporting tools; who needs a single ‘monolith’ and a ‘single point of failure’
6. Why not benefit from the competition between different product vendors who will redefine the organization landscape – no big player can bully the organization
7. The initiative may be ‘time bound’ and ‘returns’ needed faster – why disturb the entire org ecosystem?
8. Let the profit centers part some money to invest in the local initiative while providing lesser headache to the parent organization

Nice post Ray.
I have some thoughts around the reasons not mentioned explicitly here but are important.
1. Is the organization ready to merge differenty ‘cultures’ and ‘ideologies’ into one monolith?
2. Do we want to make the local entities force fit into a global solution. Is this ‘big brother’ approach good for organization?
3. Why not leverage what is best for business with undelying tenet of ‘simplicity’
4. Are users ready for a radical change?
5. With maturing integration scenarios, mechanisms and reporting tools; who needs a single ‘monolith’ and a ‘single point of failure’
6. Why not benefit from the competition between different product vendors who will redefine the organization landscape – no big player can bully the organization
7. The initiative may be ‘time bound’ and ‘returns’ needed faster – why disturb the entire org ecosystem?
8. Let the profit centers part some money to invest in the local initiative while providing lesser headache to the parent organization

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Meet R "Ray" Wang

R “Ray” Wang is the Principal Analyst, Founder, and Chairman of Constellation Research, Inc. He’s a best selling author of “Disrupting Digital Business” published by Harvard Business Review Press. His popular business strategy and technology blog “A Software Insider’s Point of View” has a viewership in the 10′s of millions of page views a year. Ray’s blog provides insight into how disruptive technologies and new business models impact the enterprise.